Thursday, June 25, 2009

Wednesday, June 24, 2009

We oppose the decision taken by Securities and Exchange Board of India (SEBI) said that entry loads will be discontinued. As SEBI said that the investor availing the services of the advisor will pay the charges directly to him rather than the AMC paying to the distributor. However, in their zeal to copy-paste the practice, SEBI did not take ground realities into consideration. Investment advisory is not yet considered a profession in India and that’s why advisors are not being treated as professionals like doctors, lawyers etc.

Moreover, the practice of investor paying the advisor directly is practically impossible. For example, how would the advisor recover his charges in case of a monthly SIP? Should he charge the investor for the entire period of SIP? Or should he charge the investor after the debit has happened? There are bound to be defaults in payment of advisory charges!

SEBI in its effort to stop the system of pass-back of commission, has only legalized it and has in turn helped the big and corporate distributors rather then the marginal distributors who run their homes on such commissions!

SEBI's action will be only help bigger distributors consolidate their hold over the industry.

SEBI should not kill an industry and livelihood of millions of people in its effort to stop a malpractice.

We do not think that this is at all a good step from SEBI. In any business 2 per cent margin cannot be considered as very high. There are products like insurance where the margin for distributor is anyway in the range of 20-40 per cent. Why SEBI does not want to be a well-wisher for the insurance investor the way it is trying to be for MF investors? Whatever growth has happened in the mutual fund industry is because of distributors. we agree to the fact that there are advisors who do not guide the clients properly. But that cannot create the base for this step. Given the priority this should first happen with the insurance sector.

SEBI’s move is not only bad for investors, but also for the future growth of MF industry. We expect a similar type of action from IRDA, particularly for ULIPs, to protect investor from mis-selling.

we personally feel coming days are crucial for MF industry.

AMCs might come up with new packages to attract distributors.

Majority of IFAs, who sell only for brokerage structure, may run away from MF industry to ULIPs, from where they can earn a lot.

Most of the distribution channel including banks and NBFCs might lose their interest in selling MFs.

MF industry will stabilize mostly for them, who actually provided services and sold only worthy schemes to investors as per their requirements, and only for those who updated their knowledge and way of doing business.

But the problem also lies with Indian investors and their mindset. Most of them will not be ready to pay even small amounts directly from their pocket, although they had paid more in past. Follow up would be an add-on job for distributor.

"Instead of finding the remedy for the disease SEBI is trying to kill the patient"

NO ENTRY LOAD decision assumes:1] The whole Indian population is highly educated , fully aware of financial markets and has an in-depth knowledge of MFs;2] Mutual fund (MFs) industry has reached to every corner of the country, just like post offices;3] MF. has country wide network in every city & smallest of the town as the banks in India have4] MF offices are is easily accessible in every part of the country;5] Almost 60 years since independence, insurance penetration in India is one of the lowest in the world, but the same population is highly intelligent and fully aware when it comes to MFs;6] Because of high penetration of MFs, there is no need to pay even 2 per cent to distributor;7] Investors can approach MF offices, there they get very IMPARTIAL advise -- that their funds’ performance is not so good, so kindly approach ‘XYZ’ AMC and invest in their products;

Because of all these reasons there is no need of any DISTRIBUTOR to work.

In my opinion no entry load decision will help only 3-to-5 per cent of investor community which is well educated, well informed and lives in big cities, but totally KILLS the product and the DISTRIBUTOR too in small cities and towns.

This decision is like a sword given to investors. Only 5 per cent of the financially aware investors’ community will use it properly, while rest 95 per cent of the people, who are totally financially illiterate will misuse it and harm the distributors.

On one side SEBI says that small investors should be the focus of MF industry, but on other side it is trying eliminate individual distributors who are their only representatives in small cities and towns where there is no MF office.Just by opening offices in selected big cities, you cannot reach out to the common people. MFs have zero presence in most part of the country. The only representative they have there are individual distributors working against all odds. If you are not ready to pay even 2 per cent commission, then this tiny presence will also vanish.

No entry load decision is taken only for the benefit of high networth individuals (HNI) and corporate clients. It will benefit high profile investors but it is against the small investors because no individual distributor will work aggressively as there is no proper commission and future prospects are bleak.

If SEBI has a problem that funds are not sold with transparency and distributors unnecessarily churn the funds, then it can start investor education programmes/seminars or give advertisement in media to avoid mis-selling by distributors. Lock-in periods can be made more stringent and exit loads can be made more restrictive to avoid early redemptions.

Instead of finding the remedy for the disease SEBI is trying to kill the patient.

Everybody knows that MFs have the least expenses, still small investors are opting for ULIPS to invest in, which carries expenses/allocation charges up to 80 per cent in some cases. If that small investor is still not aware/caring/bothered about the vast difference between 30-to-80 per cent load in ULIPs and just 2.25 per cent in MFs, then what is going to change even if there no entry load.

In last 5-to-7 years, private insurance companies have reached into every district and tehsil, but AMCs are limited only to certain cities. Distributors from small cities have to face huge problems in processing the purchases, redemptions, or any transactions. They have to bear courier charges for every transaction to send the documents to AMCs. Every transaction gets delayed by 2 – 3 days because of this.

If you want to grow the mutual fund industry, the focus should be on investor awareness, expansion and penetration of the industry in small cities, which can not be done without the help of distributor.

"Investors and distributors are two legs and there is no use removing one of them"

Why work when one is not going to gain anything from it? Securities and Exchange Board of India (SEBI) is asking the Mutual Fund (MF) industry to increase penetration among retail investors but has taken out the reason. One should take steps which helps one work honestly. It was a good decision to remove the necessity of furnishing a PAN card for SIPs up to Rs 50, 000, and the board should also consider taking other such steps like reducing the minimum SIP amount, facility of a daily SIP and depositing through cash instead of cheque. Investors and distributors are two legs of the MF industry and there is no use removing one of them.

"AMFI and AMCs should also take a stand"It seems that the present SEBI dispensation has a grudge against the distributor community. The present decision is an act of arrogance on part of the board. It is very clear that the authorities did not think properly while formulating the policy of abolishing commission to MF distributors. No Indian investor will pay a second cheque for commission. Instead they will go to the AMC directly after consultations.

Or did the board buckle under the pressure of the powerful insurance lobby. Because IFAs were advising investors to invest money in MFs rather than ULIPs which charges a heavy amount on various heads. But IRDA is well aware that only insurance advisors can bring in business. SEBI's stand is quite opposite. It wants to eliminate IFAs and promote corporate brokerages and banks. Banks only promote schemes which suits them the most.

Some time back there was an opinion that FIIs should also be charged entry loads as they were entering and exiting MF schemes at will at the cost of retail and small investors.At the time of the financial turmoil when FIIs and corporate investors pulled back their money, it was the retail investors who stayed with the AMCs due to their belief in their advisors. The advisors job includes educating the new investors.

We always told my clients about the commission paid by AMCs and they were comfortable with the load till they were getting good returns from their investments. A few months ago a very senior official of a leading AMC opined that SEBI is worried only about the 2.25% of the investment rather than the major part of 97.75%. If an IFA brings in for example 50 new investors who for a start only invest a minimum of Rs. 5000/- and pays 1% commission, the IFA will be have a bundle of cheques of Rs.50/- each. A single cheque would have served the purpose if the AMCs were to collect the commission and then disburse it to the distributor.

If a small investor who has an SIP of Rs.1000/-pm, and agrees to pay 1% commission, is it practical for him to issue a cheque every month. we don't think the investor will be willing to pay in advance for the entire period opted for SIP. The AMFI and most of the AMCs believe they can bring in business without the help of IFAs. Another suggestion was shifting the business to insurance ULIPs. It would be unjust to our investors who has reposed their faith in us. The best way is to stop selling for some time. Let AMFI and AMCs take a stand instead of simply watching from the sidelines.

SEBI is perhaps bringing in new rules every time to finish all distributors. We are not eating up all the money that is invested. It is the insurance companies which is doing it. SEBI is only concerned about 2.25% entry load in MF whereas in insurance even up to 100% is charged in some policies and SEBI is not bothered about it. The only culprit in front of SEBI are we distributors. I agree that in all sectors, cost of each product should be disclosed and then margin of profit should be bargained. Instead of writing MRP on each product they should write cost price of that product.

On one hand SEBI is implementing KYC to prevent black money and on the other hand they are encouraging others to create black money. Firstly, none gives cheque for commission and even if one has, then they will deal in cash instead of cheque. This will not only create more black money but also there will be huge loss of revenue in form of Income Tax and Service Tax.

The next steps would perhaps be writing to the finance ministry telling them about the huge revenue loss in form of compulsory Service Tax deducted and also Income Tax that is paid on same amount. MF companies are least concerned with our interest and are working closely with the board it seems. More than One lakh distributors and several lakh sub-brokers and employees connected to them will be affected indirectly.

" SEBI’s regulation invites many questions"There are certain potent questions which we as financial advisors distributing Mutual Funds, would like to ask SEBI before they implement the no entry load on MF rule. Have they genuinely thought about it or wilted under the ‘pressure’of lobbying from a separate regulatory body?

1) What investor benefit are we talking about? Does an average investor know the appropriate fund selection process according to his risk profile or the path to achieve his goals for the long term? Does he know the capital risks attached to his mutual fund investments? If a genuine financial advisor imparts his advice to the investor, is he not entitled to his professional fees by the regulatory authorities? Is imparting financial education or creating awareness a professional job or a crime?

2) Why does SEBI always create roadblocks and crack the whip for the Mutual Fund industry at precisely the time when there is a genuine requirement of retail participation in the capital markets? In February 2008, when the markets were sliding, KYC requirement came into action and now when the Indian investor is recovering from the gloomy scenario and is ready to participate, there comes the final nail in the coffin – de-linking the distributor/ advisor/AMC from the retail investor.

3) Why is an ambiguous product like ULIP promoted and rewarded by the authorities to its agents selling it to the unaware investors? If we are talking about Investor benefit here, every qualified financial professional will understand the difference between investing in a ULIP and a Mutual Fund. Why this hypocrisy? If you genuinely want uniformity then let's have common commission structure (2.25%) for an agent selling a ULIP and an equity mutual fund. If the distributor/ agent have basic financial knowledge and investor benefit in his mind, ULIP as a product will completely fade out.

4) Does SEBI envisage a situation when an AMC would appoint executives to make direct calls to the retail investors or for that matter send their personnel to get business from NRI's / HNI's based outside India. Who would be responsible for bringing investments to the AMC's? It is us distributors who have taken this onus.

This move sincerely defies logic and has come as a very rude shock for all of us. We as financial advisors feel back stabbed not by any outsider, but by our own.

“All in all, the decision is bad for everyone it is supposed to help”I feel the effects will be:1. No service will be given to small clients as they cannot afford a service charge of say even Rs 500,which will be 10 per cent of Rs 5,000;2. Brokers will push ULIPs more, which are harmful to the investors;3. Brokers will shift to other lines of business;4. Neither do the AMCs have the capacity to directly entertain so many investors, nor they have the reach;5. Small investors will have to leave their work and spend time in queues, unlike HNIs who can send their staff or drivers; All in all, the decision is bad for everyone it is supposed to help.

“The mutual fund industry has become the soft target for so-called reforms”

Although SEBI has implemented lot of good changes in the financial industry, off late we find a lot of inconsistency in terms of its implementation, particularly in the mutual fund industry segment.

The mutual fund industry has become the soft target for all the so called reforms. SEBI has been trying to say on one hand that they want to penetrate the Indian market in a big way by bringing in more retail participation in the mutual funds. But on the ground the agenda seems to be different.

The recent move on the part of SEBI to implement No Entry Load thereby abolishing the Upfront Distributors Fee may bring in an illusion that it is a blessing in disguise for the investors. Such a model may suit the so called knowledgeable investors but for those who are in the process of accumulating wealth for long term the 2 per cent fee is not a great deal. They not only get advisory services, but also get a relationship which otherwise no other segment can ever match.

In India it is practically impossible to get the right fee for an advice. Such a concept can prevail in a country where the financial literacy is quite high. Even in such a so called financially literate country there are mutual funds which charge as high as 8 per cent entry load.

SEBI has a decent corpus in the form of Investor Education Fund, but we don’t find adequate investor education being imparted by them. They should start concentrating on macro issues rather than on micro issues.

SEBI talks about openness, free and fare treatment in all its dealings. But when it comes to its own decisions everything is forgotten.

The latest being a drama conducted by SEBI in the form of inviting views on the implementation of Variable Load in mutual fund schemes.

There were lot of opinions and the majority favoured either no change in the existing system or implementation of Variable Load in phases. But everyone had outright rejected the two-cheque model. But finally when the curtains went up we saw that only the one which was rejected by one and all has found its way.Everyone knows that the distributors are paid by the AMCs. The investors are aware about the entry load charged and they clearly understand that full or part of this is being paid to the distributors for the services rendered. No one is unhappy if the AMCs pays more to the distributor than the amount of load it carries. Why should anyone bother as long as they are not charged more than the percentage stated in the offer documents?

There are several financial instruments available in the country be it Govt of India Bonds, small savings, insurance or any other and the applicable brokerage are all paid by the institutions and no one asks to collect the remuneration from the investors. It is strange that MF distributors are asked to collect the commission from the investors. Already there is no entry load for applications received directly from the parties but the response is very poor as most investors are dependant on the services of advisors.

'Investors Are Not Self-Motivated'

We have found a unique way to protest against SEBI’s way of thinking. Mr Bhave thinks that, after abolishing entry loads, investors will invest more because of cheap products that offer no deductions. But we want to tell him that there are no self-motivated investors (because MF doesn't guarantee returns and most Indian investors want capital protection). Who will voluntarily want to invest in MFs? Brokers are the ones who mobilise investors funds towards risky assets like mutual funds.

In any case, all the self-motivated investors are already investing directly with AMCs.

Now, distributors can adopt a new strategy and they can start boycott MF industry and also start mobilising funds from mutual funds to other investment products like life insurance and post office schemes.

“Nothing is free in this world”We just wanted to say there was an action taken by SEBI a few month back where anyone can go to AMCs for investments and without giving any entry load.

But if someone wants to come through a broker and needs guidance and help to chose fund according to his risk tolerance, he should be charged, like any doctor or CA does.

But my dear friend, in India no one is ready to give any money for any service they receive.

Nothing is free in this world, we think the best things in this world are free i.e. nature, but it too takes something from us in return i.e. years of ours lives.

If an investor has an option of investment made in mutual fund to chose from direct method of applying or from broker, that is fine if he goes directly he/she won’t be charges any entry load, and if he/she chooses to come to a broker he has to pay an entry load of 2.25 per cent, that is fine and transparent enough.

That is where the case should be closed.

'SEBI Wants to Remove Retail Investors'“One senseless decision has crushed the efforts and hard work of thousands of financial advisors like me”

We indeed are in big trouble now. I do not understand what made Mr Bhave take such a drastic decision.He has ruined the lives of thousands of distributors whose main source of livelihood was MF distribution.

Initially I was told by some AMC people that this move has been taken to improve the standard of Indian mutual fund market and take them to the quality standards applicable in America. It makes no sense comparing America with India. In America they put you behind the bars if they catch you with pirated software whereas in India about 90 percent of the literate population who own a computer have pirated software. It is senseless comparing India with America.

It looks like people sitting at the top level in the regulatory body do not have any idea about the ground level reality. If Mr Bhave is so much bothered about the transparency then what did he do to those 3 AMCs who had done shabby deals with the promoters of some mid-sized companies somewhere in the month of Jan-Feb 2009?

Why didn’t the SEBI inform the investors about such deals and publicly announced the names of the AMCs -- the Economic Times mentioning the shabby deal without mentioning the AMCs name.

In India we have to go to the investors and convince them to investing in mutual fund.No investor would be ready to give a separate cheque as fees for our advice and services. In India we are living in a society where advice is considered free.

Ever since I started mutual fund consultancy I have been slogging day and night to build strong relations with my clients. Never cared for the scorching heat of the summers or the heavy rains. I just kept working because I thought I can make a wonderful career in this business. I started dreaming again. My sincerity and hard work had started paying off when one announcement of Mr. Bhave ruined everything. I have no words to express how helpless I am feeling now. One senseless decision has crushed the efforts and hard work of thousands of financial advisors like me.

I do not see any career in this business now.I pray to god now to give us courage, enthusiasm and will-power to start some new business which can give us the financial freedom which mutual fund industry gave. I also pray to god to give Mr Bhave some wisdom so that next time he doesn’t take any such senseless decision who spoils the lives of thousands of people.

“If investors approach AMCs directly they will receive biased advice”

It will be suicidal for the mutual funds in India as the industry is at a nascent stage at the moment. If IFAs/ Distributors would not get upfront brokerage, most of them have to change their preferences and there would be hardly anybody to advise retail investors. If investors approach AMCs directly they will receive biased advice and in this way, MF share out of total savings would be decreasing instead of increasing, which is just opposite of what our government wants.

Investment Instruments Pay Structure of Commission available in the India Market.

Wednesday, June 17, 2009

To an average individual, an ‘insurance’ policy is something you get returns from, not something that insures your life. Returns generated, flexibility of investment options and plans are talked about as if they are the essence of insurance. Unfortunately this is far from the truth – insurance still is very much about, and only about, covering your life! In the long run, relying on an insurance product to give you returns could be fairly counterproductive and even value destroying.

Say you are a person who is very risk-averse. Naturally, you need to be satisfied with lower returns in this case. The best ‘investment’ products for you, though they may not sound sophisticated enough, are still the good old bank fixed deposits, the PPF, the NSC and debt mutual funds. These can easily earn you double the returns of an insurance policy like an endowment plan or a whole-life plan. And if some agent comes and recommends a ULIP in such a case, this is probably worth complaining to the authorities – ULIPs are equity linked products and are risky. They are not at all suitable for a risk-averse person like you.

But say you are the more adventurous investor. Possibly you have age on your side and hence feel confident of being able to take on more risk, in the expectation of higher returns. This is a perfectly valid position to take, but now comes the next step of comparing products.

ULIPs or Unit Linked Insurance Plans offered by a majority of insurance companies provide the benefit of capital appreciation by investments in various schemes in debt and equity markets. Although this sounds like a good idea, the high costs associated with such complex products bleed you dry immediately after you pay the first premium. Worse, since you have taken the maximum loss the moment the first premium is paid, it does not matter if you choose to discontinue later – the company and salesman have already made their money from you. “More complex the product, higher is the associated cost” – is a good axiom to always keep in mind in such matters. A simple mutual fund or even a few blue-chip stocks would get you much higher returns and keep your portfolio simple to understand.

A brief comparison

For the more mathematically inclined among investors, a brief comparison would be needed to convince you of the statements made above. Let us compare your corpus and insurance cover in two cases:

Where you opted for a ULIPWhere you invested in a mutual fund; and took a term cover on your lifeWe have taken actual ULIP and mutual fund schemes for the following comparison.

Thus, ULIPs carry almost a third of additional cost. There are several other disadvantages, as mentioned below

Highly illiquid: Switch over between ULIPs of different insurance companies is not possible in case their performances are below par. Worse, most ULIPs do not even disclose details about their fund management and their portfolio to the investorsDeath benefit: In case of ULIPs, policy holders gets either the sum assured or the value of the units s/he holds, whichever greater in case of death. In case of mutual funds + term insurance, one avails the benefits of both; fund value and the sum assured in case of death. Some ULIPs offer both these benefits, but their costs are even higher than mentioned aboveCosts knocked off straightaway: The moment you enrol for ULIP and pay the first premium, the worst is behind you. The structure ensures that the costs are heavily front-loaded and hence an investor who exits thereafter does so at his own lossPoorer fund performance: ULIP fund performance has been far from satisfactory in general and has often lagged behind the market. It is not uncommon to see investors who put money in ULIPs over the last calendar year and find their portfolios down to 30% of their investment – thanks to a 30% cost loading, and a 50% knock in fund value in the recent market crashUndoing the damage

Say you have already enrolled for a poorly thought-out insurance product. Let us examine the best options to optimise your future cash flow, without worrying about the losses of the past:

If you have entered an endowment or a whole-life scheme, you can typically salvage most of the premiums paid, and earn a basic return after five years of enrolment. Five years is the best time to exit such a policy if you have a long earning career ahead thereafter. In this case, you can invest the proceeds in more carefully chosen equity related instruments so that your upside potential is higher.Is you have entered a ULIP, unfortunately the worst is behind you and you cannot do much. Unless you are an active investor in the markets, you would be better off continuing the ULIP for the rest of its life. Needless to say, the agent may approach you after the lock-in period recommending you switch to a ‘better’ ULIP, but now you should know better! There is one to-do however - track the fund performance of the ULIP closely. If it underperforms the market by more than 5% points, you should exit after the lock-in period and go for a good mutual fund.- Ramganesh Iyer

Pick up any mutual fund portfolio of an active investor and you will usually find it beset with typical problems. These can affect the overall performance. If we can understand, identify and rectify these common blunders, we can make much better returns out of our money.

A bloated Portfolio

Many people have the habit of collecting funds. Over time, therefore, you will find such portfolios having 40-50 funds. Diversification is good, but over-diversification is not.

Firstly, a large portfolio would mean that some funds in the portfolio will always be below-average, thus dragging down your total returns. Secondly, even with all the support of the computers and specialized websites, it is not possible to effectively manage a large portfolio. This again is going to impact the performance on the whole.

One should, therefore, have a limited but power-packed portfolio. The idea is to extract maximum punch with minimum cost and effort.

Chasing the Top Performers

There is too much focus on the performance and that too usually the recent one say over 3 months to 1 year. That’s why you always find this fascination among people for fund rankings.

Of course, performance matters! But making performance (and that too short-term) as the sole selection criteria can prove counter productive.

Historical evidence shows that no fund can always remain the top performer. It also shows that a fund, which has been consistently amongst the top quartile say over 3-5 years, will usually continue with its’ good performance. Similarly, a consistently poor performing fund usually finds it difficult to make it to the top.

Besides this the markets, as we all know, are highly sentiment-based. Therefore, more often than not, you will find some theme or the other being market fancy. It could be infrastructure, mid-caps or technology and so-on. At any given time you will find that most of the top performers belong to the same category.

So if you chase top performers you will end with similar schemes in your portfolio. In the process, the portfolio becomes concentrated, defeating the very idea of using MFs to diversify one’s investment.

Your focus should not only be the past performance but also reputation & management of the AMC, fund’s investing style & focus, asset size, etc., besides of course, other key factors such as your investment horizon, risk appetite and other funds in your portfolio.

Mismatched and Unbalanced

It is but natural that the money you need in the short term should be in debt, while only the long term money should be in equity. Liquidity apart, your asset allocation between debt and equity should be in line with your risk appetite.

Some people of course do not do so. Some others start in planned manner. But, as equity and debt follow different paths, over time the portfolio will become mismatched and unbalanced.

As such you may either be over-exposed to equity thus increasing risk; or under-exposed thus losing out on the benefits of equity.

Or a liquidity mismatch may happen between the investment and your need. For example equity markets may be down when you need money, thus forcing you to sell at a loss.

Thousands of pages have been devoted to pointing out the myth of NAV. Yet the logic that NAV has absolutely no bearing on the future returns, simply does not register with a common investor.

Hence one can see thousands of crores flow into NFOs especially in a bull market, while the existing funds get practically nothing. In fact, it’s the opposite. People switch out of existing schemes to invest in NFOs under the false impression that Rs.10 NAV fund is cheaper.

As such a typical portfolio would be infested with NFOs. Higher costs in NFOs vis-à-vis existing funds will eat into the returns. Also as the so-called low NAV is why you invested in the NFO, it is quite likely that the fund’s style and focus does not fit with your needs. This also is going to hamper your returns.

Too Much Churning

Call it impatience or a false sense of being proactive or the instant-culture - we simply cannot wait and watch our portfolio grow. We always feel that we need to do something regularly.

Therefore, as soon as a fund shows good appreciation, we are quick to book profits. Or if a fund does not move for some time, we are equally prompt to dump it. This, for one, is adding to the costs in terms of capital gains taxes, entry loads, exit loads, STT, etc. But more importantly, we may be getting out too soon and thus missing out on future performance.

For example, I know investors who want to exit from some funds whose focus is on smaller or mid-sized companies. Now these are the funds, which usually will take time to show returns. It’s quite logical. A Bharti or a Suzlon or an Infosys did not become big in one day. Similarly, who knows how many such future stars are there in these funds? If we wait for 3-5 years, many such budding companies will blossom into beautiful flowers and give us super-normal returns. The question is – are we willing to wait for it?

Building and maintaining a well-diversified and balanced portfolio is no rocket science. All it needs is common sense and discipline to act prudently, promptly and purposefully.